Three Ways to Fight Back Against Rising Costs

May 5, 2014

By Chris Horacek, VP, BravoSolution, the supply management company

American shoppers are in a sea of sticker shock. Rising retail prices are dominating store shelves and in turn, are hurting consumers’ wallets. Food prices have been hit especially hard — skyrocketing by more than 4% in February alone, which represents the biggest jump in more than two years.

With consumer discretionary incomes shrinking, retailers can’t pass all these costs along to their customers. However, if retailers aren’t passing along the costs, how can they protect their slimmer-than-ever profit margins?

The answer lies in the supply chains of the most successful retailers that have found new ways to cut costs and as a result, keep customers coming back. Here are three strategies that are separating retail leaders from the laggards.

1. Source Smarter

All too often, retail supply chains are littered with opportunities to slash costs. Supply management teams only need to step back and think more strategically about how they interact and select suppliers, and spend their money.

For example, retail parent companies that have multiple store brands often have multiple contracts, at varying prices, for the same product – even if they are all using the same supplier. Similarly, one supplier may be used across multiple product categories and corporate divisions, but yet again, a retailer may have multiple contracts with that supplier.

These discrepancies and variances can cost retailers millions of dollars every quarter. To solve the problem, retail procurement and supply management teams must start by getting better visibility into their total spending across the supply chain – drilling into specific categories, product lines, departments and corporate brands.

From there, retailers can identify new ways to consolidate suppliers and overall spending, ensure consistent pricing and benefit from volume-based purchasing. The result: on average retailers can lower costs by two-10 times, just from smarter purchasing approaches.

2. Conquer Transportation Sourcing – Finally

Transportation is often the most difficult category to source; however, the effort reaps big rewards considering it typically accounts for 20%-30% of a product’s total cost.

With hundreds – or thousands – of transportation carriers, and rates that change daily, constantly ensuring that the optimal transportation mix is in place is a tremendous burden. Supply management teams must make fast, critical decisions based not only on price, but also on-time delivery rates, capacity and service fees (fuel surcharges, handling customs, etc).

The only way to be effective is to make decisions based on data, rather than hunches. Retail teams need an apples-to-apples comparison of the true costs, benefits and risks of each transportation scenario so they can make informed decisions about the trade-offs of each transportation mix they’re considering (mode versus capacity, versus lead times, etc.). Having this data sets the stage for growth, new savings and more efficiency.

3. Keep Stores Running – Without Breaking the Bank

Once products actually get onto store shelves, there are still opportunities to save. The bigger the store, the more it costs to maintain. On average, facility management and services, including janitorial services, building maintenance and security, account for seven-10% of the cost of goods sold.

Retailers can cut facility services costs by using some of the same strategies discussed earlier for sourcing merchandise. Retailers typically use multiple suppliers for various parts of facilities management – one supplier for snow removal, another for parking lot maintenance – even though there are suppliers that can take on multiple services, at a lower cost to the retailer. One big-box retailer has tripled its savings in this category by doing exactly that.

Another hidden cost: national facility management suppliers often have different costs for each geographic region, but only list an average price in a contract. Retail supply management teams can uncover even more savings by better understanding the costs and service differences between local and national providers. In many cases, the national vendors that retailers partner with may already be subcontracting with local suppliers – and keeping the price savings.

The common denominator for all three strategies: spend and supplier visibility. With no end in sight of rising costs, uncertain commodity prices and declining discretionary spending, it’s more important than ever for retailers to uncover new ways to improve margins and profitability. That begins with the supply chain.

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